Trump’s Self-Inflicted Economic Wounds

The U.S. economy is often compared to a cruise ship—it takes a lot of time and force to change its direction. This is why so many economists looked at the strong economy that was inherited by the Trump Administration and projected fast growth, low unemployment, declining inflation, and healthy stock market appreciation continuing for the next couple of years. But President Donald Trump’s impact on the economy so far has been less a matter of turning the ship’s rudder and more similar to a ship firing torpedoes at itself.

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The reversal in economic data since the Trump Administration took over has been historically rapid—and bad. The stock market is in near free fall. Interest rates are also falling, but for an undesirable reason: investors are assuming the Federal Reserve will need to swoop in soon to try to aggressively rescue a falling economy with future interest rate cuts. Unemployment insurance claims for federal workers have noticeably jumped even before the full force of the Department of Government Efficiency (DOGE) layoffs have been recorded.

Of course, economic data is reported retrospectively. But “nowcasts,” short-term predictions which allow us to estimate the current and future states of the economy, indicate that growth in gross domestic product for the first quarter of 2025 is collapsing, with some prominent projections showing outright economic contraction. Of note: A recession is often defined as two consecutive quarters of economic contraction. Plus, measures of economic policy uncertainty are rivaling, or exceeding, what prevailed during the worst phases of the COVID-19 pandemic.

None of these negative economic consequences were necessary, or even easy to make happen. It required a series of significant economic policy mistakes to make this scenario come to pass.

Much of the commentary around this stunning reversal of economic fortune focuses on Trump’s tariff proposals. It is true that Trump’s trade policy has involved chaotic shifts which threaten to destabilize the U.S. economy. But focusing only on his tariff policy misses other key policies that have been similarly damaging. Rather, the high-profile whipsaws on tariff policy have mostly made people realize that the misguided economic ideas championed during Trump’s presidential campaign really might come to pass.

Take the potentially illegal actions of Elon Musk’s DOGE. While the precise impact of DOGE’s cuts to the federal workforce is hard to predict, the plan to destroy the capacity of the federal government by any means possible was stated plain as day during Trump’s campaign. Russell Vought, now director at the Office of Management and Budget (OMB), was a chief architect of Project 2025, and in this role said: “We want the bureaucrats to be traumatically affected… We want their funding to be shut down.”

Now it is clear that large-scale federal layoffs will likely have a short-run drag on economic growth. But even worse, the valuable services provided by federal agencies—which are often a needed input and infrastructure for private-sector activity—will wither and this degraded capacity will drag on growth for years to come. One key piece of evidence on how valuable these services are: When employees leave the federal government for the private sector, they tend to work fewer hours and earn significantly more in their new private-sector jobs. Trump’s claim that many fired government employees “don’t work at all” is quantifiably false. The federal workforce is an absolute bargain in terms of value provided, and there’s nothing “efficient” about arbitrarily gutting it. 

The Trump Administration’s desire to enact mass deportations has yet to come to pass at scale. If it does, it is widely recognized that it would constitute a blow to the supply-side of the U.S. economy, depriving large swathes of U.S. business the labor force they rely on to produce goods and services. Mass deportations would cause enormous price spikes in the food and construction sectors. At least part of the recent softening of economic data surely represents business leaders starting to take these deportation threats literally and seriously. 

Trump’s policy choices are also stifling investment in the economy, even among wealthy Americans—and for good reason. The policy landscape in front of business leaders who make investment decisions is tumultuous. Empirical measures of economic policy uncertainty are on par with what was seen during the global COVID-19 pandemic. In fact, that moment in history can help us quantify how significantly Trump is negatively impacting the current economy. 

During Trump’s first term, the economy performed decently. Though some may say his economic success from this term was also largely inherited, GDP grew and unemployment remained low. However, the economic success of Trump’s first term abruptly ended after three years because of a pandemic that rocked the global economy. 

But this time around, the second Trump Administration has ended a strong inherited trend of economic growth in just two months with a string of policy decisions so bad that might match the destructiveness of a once-in-a-century pandemic in the minds of consumers and business owners.

This outlook and uncertainty are why economic indicators have begun warning of an imminent growth collapse, as Trump proposed policies look set to deliver sharp negative shocks to both the demand (Medicaid cuts and federal layoffs) and supply-side (deportations and tariffs) of the economy. For instance, cutting Medicaid benefits would mean consumers would either forego needed health care or would have to give up some other purchases to keep receiving the same amount of care. And on the supply-side, tariffs push up costs for domestic consumers by design while deportations reduce available labor supply.

Absent a complete series of policy reversals, economists such as myself predict unfortunate consequences for the U.S. economy. Layoffs of federal employees and contractors are already causing spillover effects in the private-sector as well as among contractors and small businesses. The federal cutbacks will hit the D.C. area hardest, but almost 80% of federal workers do not work in the D.C. metro area—they are spread over every state and congressional district in the country. As a result, unemployment rates will likely rise over the coming months. The stock market declines may also lead to cutbacks in consumer spending. Plus, the trade war could stunt export growth and raise prices for consumers. Potential Medicaid cuts could also force closures of rural hospitals and squash spending on other goods and services as recipients have to dig deeper into their own pockets to buy needed health care. Deportations will likely lead to spiking prices for food and housing.

In short, the Trump Administration has started down a path of determined de-growth for the U.S. economy. There is still time to avoid a deeply damaging period of economic distress—but it needs to happen soon.

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